Conspicuous Consumption on the Long Tail: How Can Luxury Brands Benefit from Counterfeits?

Abstract

We study how luxury brands can use product line expansion as a strategy when facing a threat from the counterfeit market. Consumers who are status-conscious consider the benefits and costs of buying luxury items in order to strengthen the beliefs of others about their status. Our findings suggest that product line expansion strategy serves these high-end consumers and their motives to strengthen their status image. In a market with counterfeiters, consumers have an incentive to buy additional products in order to reduce the uncertainty of their status signals. Increasing consumption makes it harder for others to imitate status when authentic brands signal quality and status with higher precision compared to counterfeits. Since each luxury item purchased contributes to one's status in a marginally declining fashion, it is rational for a luxury brand to expand its product line such that it maintains its core product and introduces peripheral products with lower status signalling benefits and prices. We further show that an increasing counterfeit market share can increase status-conscious consumers' willingness to pay for luxury goods. As a result, presence of counterfeiters can increase the prot of a luxury brand.